Further reserve cuts only if banks ‘behave,’ BSP says

The pace and magnitude of future cuts in banks’ reserve requirements—if any at all—will be determined by how banks themselves use the almost P200 billion in fresh liquidity that will be released into the local economy over the next three months.

In particular, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said he wanted to see if local financial institutions “behave” by channeling the fresh cash from the 2-percentage point reduction in the reserve requirement into productive loans rather than being used to speculate against the local currency.

“Proper use will encourage further cuts, but speculation [against the peso] will do otherwise,” he said. “BSP will closely look at how banks will use funds freed up by reserve requirement cut.”

The central bank’s aggressive move approved last week will be implemented in three tranches over the next three months. It is meant to bring Southeast Asia’s highest reserve requirement ratio to single digit levels, Diokno said earlier.

The BSP chief described last week’s move as a “unanimous” decision by the seven-member Monetary Board that runs the central bank.

“Originally the plan was for four 50-basis point cuts, but we decided on a more aggressive [stance],” he said, adding that the policy meant to take effect by month’s end would help reduce market speculation and allow bankers to realign their portfolios.

“There’s no point in postponing what should be done anyway,” Diokno said.

The central bank chief originally came into office voicing a strong bias for monetary easing after last year’s nine-year-high inflation rate was contained by government structural reforms and a series of rate increases that totaled 175 basis points.

In a separate statement, the BSP said its Monetary Board “recognized the continued downtrend in domestic inflation,” with average headline inflation falling to within the national government’s target band of 2-4 percent at 3.6 percent in the first four months
of 2019.

“The BSP was also guided by the benign inflation forecasts of 2.9 percent for 2019 and 3.1 percent for 2020,” it said.

“The Monetary Board also expects this adjustment to help mitigate any tightness in domestic liquidity conditions due to limited public expenditure following the budget impasse in the first quarter of the year,” it added.

For now, the reduction in the reserve requirement from 18 percent to 16 percent will be applicable only to universal and commercial banks. The Monetary Board will review the potential cuts on the reserve requirements for other banks and nonbank financial institutions in the next round of reserve requirement adjustments.